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Thursday, March 4, 2010

Free Checking Obituary

Seeing that a lot of industry writers seem to be already announcing the death of Free Checking as a likely outcome of Reg E, I thought it would be appropriate to write an obituary for this product that saw such an active and successful life.

While many may claim to be the father of this service, paternity tests will most likely point to Ralph Haberfeld as the individual who most nurtured this service during the formative years and who was the strongest proponent of the benefits of the fee income associated with Free Checking. Ten years ago, when some banks (and consultants) began "pushing" free checking, there was concern about losing the meaningful income of monthly fees associated with traditional checking accounts.

Well, here we are, ten years later, having the same concerns about NSF/OD fees. These fees, that grew faster than the growth of checking accounts, became the prime fee income driver of well over 60% of our industry in this past decade. Ever since the introduction of these fees, banks have found ways to optimize the opportunity with strategies such as 'large to small' check presentment order.

The Fed said it focused on ATM and debit card transactions for Reg E because these have been "a key driver behind the growth in the volume and cost of overdraft fees" (41% of NSF transactions). Finally, consumers and regulators both balked, which is, in part, why we're facing increased scrutiny and regulation.

So, is Free Checking really dead? Free Checking coupled with overdraft protection is a product that is still highly valued by a small but important segment of customers who prefer to use overdrafts as a way to make ends meet at the end of the month. The outgrowth of Reg E will most likely be pseudo Free Checking that includes relationship stipulations (direct deposit), transaction requirements (minimum number of signature debits) and/or channel restrictions (no teller access). There may even be Free Checking as we know it today for those households that decide to opt-in.

In other words, rumors of the death of Free Checking may have been greatly exaggerated.

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